Investigating Efficiency of Western Consulting Firms Advising East-European Companies

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CENTER FOR THE STUDY OF DEMOCRACY

Investigating Efficiency of Western Consulting Firms

Advising East-European Companies

Bulgaria

Research Team:

Daniela Bobobeva – Coordinator, CSD Jordan Markov - Research Fellow

Sonya Dilova - Research Fellow Julia Dobreva - Research Fellow

Sofia, November 1994

PROJECT ACTIVITIES Bulgaria

According to the agreed research methodology during the Budapest meeting in January 1994, the Bulgarian research team carried out the following activities:

- A team of researchers was formed mainly from the CSD:

Dr. Daniela Bobeva - Director of the Economic Programme of the Center for the Study of Democracy, Jordan Markov - research fellow, Julia Dobreva- research fellow, Sonya Dilova - research fellow. The team prepared the draft questionnaire for the survey of the companies (first phase of the project). This questionnaire was approved by the other countries participating in the project.

- Eighty-five standardized interviews were carried out in the first phase of the ACE Research Project "Investigating the Efficiency of West-European Consulting Companies Working for East-European Companies". The aim of the survey was to evaluate to what extent the practice of using foreign or domestic consultants was spread among Bulgarian state owned companies. The survey gave an opportunity to compare the efficiency and acceptance of foreign and Bulgarian consulting companies. The main results of the survey were presented to the other teams in the project. (See the Summary below)

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foreign consultancies. The criteria were agreed upon at the Budapest meeting of the team, and were following:

- to be companies of 100% slate ownership; - to be companies with over 300 employees; - to have used the services of foreign consultancies;

- to be industrial companies active in mechanical engineering, electronics, electrornechanics, power engineering;

- (to the foreign consultant firms) to be West-European companies, and NOT multinational ones; - the consultancy must have been completed.

The strict adherence to these criteria made the access to the companies rather difficult.

For this reason, instead of the agreed 5 case studies, the team surveyed 8 companies. The reason behind this decision was that, irrespective of our preliminary arrangements, the Bulgarian companies refused to, or released only little information in the course of the survey, which was inadequate for the purposes of the Project.

One of the most serious problem was the limited access to the companies1 data. It concerned mainly the financial data and the main economic indicators. Although, according to the Accountancy Bill, each company is obliged to publish its balance sheet data, the companies prefer to pay the fines (which is 500 leva, and 2000 Leva for a repeated offence) than to publish this information.

The companies were selected in three ways:

1. From the list of the surveyed 85 companies 8 were selected, which satisfied the selection criteria.

2. The EC PHARE administration was approached with a request to identify the Bulgarian companies using West-European consulting firms.

3. The Ministry of Industry was asked to propose companies that satisfied the criteria. The selected cases had the following characteristics:

1. Branches: power engineering and coal mining, mechanical engineering, electronics, electromechanics; companies subject to the Committee on Power Engineering, the Ministry of Industry.

Regions: the companies were selected both from Sofia, and from the country - Varna, Lovech, Stara Zagora, 'Trojan, Pazardjik.

2. The consultant firms (only West-European ones) were: Ost-West Consult, Alfa Quality, GOP A, Coopers and Lybrand, GMO, 'International Economic and Energy'.

3. The subjects of consultancy were: advice on strategy, internal restructuring, financial affairs, marketing, personnel and management training.

* In the third phase the team interviewed the selected 8 companies. The team members and 4 external assistants interviewed the managers, trade union leaders, and some employees on the

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work of the foreign consultant firm in their company. After that, the team members visited the respective consultant firm's offices and talked with them about the concrete issues of the consultancy. As a result, a separate case study report was prepared on each enterprise, combining all views on the efficiency of the consultancy.

* Final report including a summary of conclusions was prepared and sent out to the other country teams.

* Following a proposal by the coordinator of the Bulgarian team, Mrs. Bobeva, the second workshop was carried out in Sofia on 10-11 December 1994.

* The project has attracted the attention of Bulgarian mass media. Several interviews and articles have been published.

'Media Coverage'

1. "Standard News": 'Ten Percent of the Bulgarian Companies Use Foreign Consultancy'

2. "Pari": 'Major Results of the Survey on the Efficiency of Consulting Firms'

Results of the Survey on the Research Project "Investigating the Efficiency of West-European Consulting Firms Working for East-West-European Companies"

Bulgaria

The preparation for the survey of Bulgarian companies, as part of the general project investigating the Efficiency of West-European Consulting Firms Working for East-European Companies, began in the month of March. The aim of the survey was to establish what part of Bulgarian companies and enterprises conclude contracts with Bulgarian and Western consulting firms, to determine the object of consultation and its effect for the consulted company.

More specifically, the survey collected information on: - the financial state of the company;

- why and how the consulting firm was hired; why a foreign, rather than Bulgarian firm was selected;

- the client's evaluation of the performance of the consultants and whether the conditions of the assigned task were met;

- are there any observable results of the work, assessment of these results;

- what measures have been undertaken as a result of consultations, how successful was the work with the consulting firm.

The survey considered 125 state-owned companies with over 300 employees. 1. TERRITORIAL STRUCTURE OF THE SAMPLE

The survey included enterprises from the entire territory of the country (small, average and large towns) and more specifically, the following towns:

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l.PAZARDJIK 2. DEVNYA 3. VARNA 4. RUSSE 5. PLOVDIV 6. STAMBOLIJSKI 7. STARA ZAGORA 8. RADNEVO 9. GALABOVO 10. KAZANLAK 11. DIMITROVGRAD 12. HASKOVO 13. BOURGAS 14. LOVETCH 15. TROY AN 16. PLEVEN 17. VELINGRAD 18. SOFIA 19. PERNIK

Ten interviewers traveled to the towns included in the survey.

2. BRANCH STRUCTURE OF THE SURVEYED ENTERPRISES

Value Frequency Percent

1. Industry 1 67 78.8 2. Transport 2 3 3.5 3. Agriculture 3 2 2.4 4. Communications 4 1 1.2 5. Construction 5 3 3.5 6. Other 6 8 9.4

The survey was rather difficult to conduct due to the complex questionnaire and the delicate nature of the data required from the enterprises.

The principal method of collecting information was the semi-standardized interview. Eleven interviewers conducted interviews with 26 executive managers of enterprises and 59 deputy managers. The interviewers were refused any data whatsoever in 30 per cent of the enterprises. Interviews were conducted for 85 companies. Bearing in mind the encountered difficulties, this can be regarded as a high share.

3. MAIN RESULTS OF THE SURVEY ON THE EFFICIENCY OF CONSULTING-FIRMS The beginning of the reforms in the economy brought about the establishment of a market for

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consulting services. Its formation was determined on the one hand by the appearance of demand for consulting services, and on the other - by the wide range of legal and economic analyses, expert evaluations and recommendations offered by the rapidly growing number of private persons and firms engaged in this specific sphere of the economy. The extremely liberal conditions for economic activity in Bulgaria allowed the mass registration of consulting firms unrestricted by any licensing procedures. The lack of such restrictions makes it impossible to make even a rough estimate of the number of firms working in this field. The absence of restrictions with respect to Bulgarian natural and legal persons carrying out such activities also applies to foreign persons. Unlike Poland, for instance, where the activities of foreign consulting firms are subject to licensing, Bulgaria is more liberal. This allowed for the registration of most of the largest international consulting firms - Price Waterhouse, Deloitte &.Touche, Arthur Andersen, Moore Stephens, KPMG, and others. The overall effect has been beneficial both in terms of a wider range and of higher quality of the consulting services offered. The increasing competition has proven to be of benefit above all to potential clients. Providing technical assistance in company management, as a normal practice in market economies, has very rapidly become common practice in Bulgaria. These processes are characteristic of all countries undergoing transformation. The role and efficiency of consulting services in the countries in transition are of particular interest not only to macroeconomics theory and to decision-makers, but likewise to the consumers and producers.

The first stage of the project involved 85 companies with predominant state participation.

One surprising finding of the survey is that almost every third state-owned enterprise has sought the services of a consulting firm in the course of the last five years, and a considerable number have concluded more than one contract for consultation.

CONCLUDED CONTRACTS WITH CONSULTING FIRMS: Number of Contracts Share of the Enterprises

None 62,4 One 16.5 Two 14.1 Three 3.5 Four 2.4 Five 1.1 _

The demand for consulting services tends to increase the larger the size of the enterprise. This is accounted for by the greater need for professional expert evaluations and analyses of

the new market environment on the one hand, and the financial resources of the enterprises, on the other. This is one of the specific characteristics of the demand for consulting services in the countries undergoing reforms. In the developed countries public resources are being invested mainly in technical assistance to small business, which has the greatest need of consulting in the elaboration of the strategy of the company, the business plan, the investment programs,

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accounting, etc. The practice in this country has shown that the principal clients are above all the large state-owned enterprises. The latter are finding it more difficult to adjust, to the new market economy conditions and therefore need professional analyses and recommendations. In addition they can more easily afford these costly services. In the countries under transition there has emerged a complex pattern of client-consultant relations, unlike the traditional bipolar structure in the developed countries.

4. THE PRICE OF CONSULTING SERVICES

The planned restructuring of the state-owned enterprises prompts the central administration to commission sector analyses, privatization valuations, elaboration of business plans and

others from well-known consulting firms established in the respective field. In this sense, the central institutions are typically the ones to make the commissions, while the concerned enterprises are the immediate clients. In a considerable number of cases these consultations are paid by foreign financial institutions. The survey has shown that of all enterprises which have used consulting services, 68% have paid for them with the company's own money, 11% with PHARE funds, 9% with funds from the World Bank, 8% - from the European Bank, and 4% - from other sources.

WHO.PAID FOR THE CONSULTING SERVICES? (in percentage)

The Companies Themselves 68

PHARE 11

The World Bank 9

The European Bank 8

Others 4

This complex commissioning institution-financing institution-client-consultant pattern gives rise to a number of internal contradictions and more often than not is the reason for lack of interest on the part of the specific enterprise to make use of the offered recommendations and expert evaluations, in which case the service proves to be quite pointless.

As has been shown by the survey, prices vary from 1,000 Leva to DM 1m, depending on the scope and duration of the required services and the prestige of the consuming firm. Not surprisingly, the prices set by foreign consultants are higher than those of local ones. Also, the enterprises tend to seek mostly short-term services - up to three months. 73.9% of the concluded contracts involve a term of up to three months.

Bulgarian enterprises still regard the prices of consulting services as high. Their management finds it difficult to accept a price of DM 1m, for instance, regardless of the obtained results. That is why, the question whether prices correspond to the quality of the work typically obtains positive answers with respect to Bulgarian firms, but negative ones with respect to foreign firms.

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5. THE OBJECT OF CONSULTATIONS

Consultants are most often approached in connection with company strategy and its implementation. Apparently, one of the mechanisms for facilitating the adjustment of the enterprises is commissioning the strategic analyses and expert evaluations from external private - local and foreign - firms. The demand for services connected with privatization comes in the second place. This is an additional confirmation of the fact that privatization is a costly process, whose success would be unthinkable without investing in valuations, in the working out of privatization projects, staff training, etc.

CONSULTING SERVICES

Type of Service Share of the Enterprises

1 . Strategy of the Firm 43.4 - Elaborating the Strategy 26.1 - Internal Restructuring 17.4 2. Privatization (Valuation, Legal

Analysis, etc.)

21.7

3. Auditing and Financial Matters 14.1 4. Introducing Information Technologies 8.7

5. Staff Training 8.7

6. Others 3.4

6. SELECTION OF CONSULTING FIRMS

Of the companies which have used the services of consultants, 60.9% chose Bulgarian, and 39.1% - foreign firms. Among the foreign firms, German ones tend to be most sought after. This might be accounted for by the traditional economic contacts with Germany and the fact that the Bulgarian economy is more familiar to partners from that country.

The chief criterion in selecting a consultant is above all the experience of the firm. In other words, preferences favor consultants who already have a certain number of contracts and have been recommend by former clients. The second important factor in the choice of consulting :firm is its international prestige, it tends to impress Bulgarian managers bin also leads to unreasonably high expectations regarding the effect of the consultation, which are subsequently very difficult to satisfy. The price of the service comes third in importance. One of the problems in consulting state-owned enterprises is that in the cases when the service is commissioned by the institution exercising the property rights (30% of consultations), the companies do not have access to the selection of the respective consultant, which subsequently gives rise to communication problems between the two sides.

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7. How ENTERPRISES EVALUATE CONSULTING SERVICES

Consulting is a complex and bilateral process which requires the building up of a certain economic and institutional culture in management. Under the deep crisis in which the larger part of the enterprises now find themselves, consulting services are sometimes viewed as a panacea, in a position to reveal the magic way to success for the firm. All of this reflects on clients' evaluation of the effect of consulting services.

The survey has shown that merely 4.3% of consultants failed to meet the conditions of the task they had been assigned. 52.2% fully met the agreements, and the remaining 43% on the whole fulfilled what the commissioning party expected them to do. Obviously, one of the problems in enhancing the efficiency of consulting is the clear and detailed formulation of the task.

The general evaluation made by the surveyed state-owned enterprises of the consultants they worked with is not very favorable. It is interesting to note, however, that even those who were not satisfied with the performance of the consulting firm nevertheless use consulting services again. On a 1-5 scale, only 4.5% of the consultants were given the highest marks, and 14.4% - the lowest. The larger part - 34.8% - were rated as passable.

The effect of consulting services depends on a great many factors, among which we find not only the quality of the provided services, but equally the readiness and ability of the clients to make the most of them. On the other hand, the deficiencies and the dynamic nature of the market situation in Bulgaria make the steps recommended by consultants very difficult to implement successfully. For instance, a professionally executed evaluation of the assets of an enterprise under privatization may lose its value in the course of the auction or rendering procedure. This is not an excuse for the mediocre rating of consulting services, but rather, an illustration of the risky character of consulting activities in an unstable market environment.

The rating on a 1-5 scale of Bulgarian and foreign consulting firms tends to give slight precedence to Bulgarian ones. At first sight it might seem illogical that, even if the respondents assess the professional qualification of foreign consultants as higher than that of Bulgarian ones, the final result of their activities is nevertheless rated lower than that of Bulgarian consultants. EVALUATION OF CONSULTING FIRMS

(1 to 5 scale)

Price Qualification Result

Bulgarian 2.66 3.00 3.80

Consultants

Foreign 3.66 3.50 3.00

i Consultants

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The survey used a questionnaire, that had been agreed upon by other country teams in advance. The interviews with individual companies focused on the following topics:

- description of the company: ownership, line of business, financial condition, management structure, future prospects for development;

- motives for contracting '.he consultant firm;

- What has determined the choice? Why a foreign consultant was preferred over Bulgarian companies?

- What has been the purpose and scope of the contract?

- Outcome of the consultant: implementation of the contract, price, difficulties that might have arisen while the project was under way.

- What has been the effect of this consultancy for the Bulgarian company - for its production, management, marketing; are there any tangible results; what measures have been taken as a result of this consultancy; is the Bulgarian sides willing to use the services of this particular foreign consultant firm in the future.

Eight Bulgarian companies were selected: 1. 'Maritza Iztok' Inc. Radnevo

2. 'Eima' Troyan 3. 'Cherno More' Varna

4. 'Disc Memory Devices' Stara Zagora 5. 'Trakia Papir' Ltd Pazardjik

6. 'Elcom' Varna 7. 'Eltos' Lovech

8. 'Metalik' Ltd Pazardjik

They had been advised by the following West-European consultants: 2. 'Alfa Quality'

3. 'GOP A'

4. 'Coopers and Lybrand' 5. ‘GMO'

6. 'International Economic and Energy'.

MAIN PREREQUISITES FOR WESTERN CONSULTANCY

The study of the 85 large Bulgarian companies showed that using consulting services is a widely shared practice in Bulgarian companies with more than 400 employees. The need of such services is determined mainly by the fast transition from centralized to market economy. This transition was accompanied by an extremely fast change in the market situation and the need to adjust the production and sales to the restructured markets . It was also accompanied by rapid changes in the type of ownership, in the system o: accountancy and many others.

All of the above mentioned factors force the companies to seek the aid of consulting firms, especially foreign ones. In other words , there is growing demand for consulting services.

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Bulgaria, on the other hand, more than 200 consulting firms have been created. This fact indicates that a free market of consulting services already exists and that firms in that field function in a competitive environment.

The following factors limit the competition in the field:

First, the opportunity to pay for Western consultancy through International financial or non-financial organizations ( which leaves Bulgarian consulting firms in an underprivileged situation, because they have no access to these funds e.g. services funded by PHARE, WORLD BANK, etc. )

Second, the statements of some members of the state administration, in which they publicly denounce foreign consulting firms , create conditions for unfair The efficiency of the consulting services depends on the overall macroeconomic situation of the country. It is also influenced by the instability and the lack of clearly defined company strategies. It is not known which companies are going to be liquidated, privatised or restructured. In more complicated cases, when the consulted companies are privatised or undergo serious changes, the consultancy is no longer necessary or helpful. Usually, large companies have more difficulties due to the fact that their strategies are developed by three separate institutions, between which there is no agreement - The Privatisation Agency, The Branch Ministry, and the governing body of the company. The lack of clearly defined strategy for structural reform is a serious impediment to the efficiency of consulting services.

Another serious obstacle is the unfavourable credit environment. The main interest rate is 75%. Banks avoid giving long-term credits. In this situation the advice of consulting firms connected with restructuring is hard to put into practice , since it involves additional investments. In one of the studied cases the consulted company had to cancel the consultancy contract due to insolvency.

Another impediment to the success of consulting services is the skepticism, traditionalism, and conservative way of thinking of a considerable part of the managerial staff, as well as the distrust in the foreign firms' competence and knowledge of Bulgarian matters.

The frequent changes in the managements of the companies impede the development and implementation of long- term strategies for growth and the attracting of foreign consultancy with that aim.

The transition period offered strong incentives for the establishment of local consulting firms, as well as for the increased demand of foreign consultancy. European Union, International Monetary Fund and World Bank funds exercise a stimulating effect on consultancy supply. These funds are designated for financing projects for advising enterprises and governments. In the newly formed competitive environment local consulting firms developed their structures and gained knowledge and gained knowledge and experience. ''Western "consulting firms, at the same time, familiarized themselves with the situation and became real 'experts' in transition economies. At the beginning of the reforms, after the first stand-by agreement with the International Monetary Fund was signed, a multitude of projects were financed. They dealt with

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restructuring of the economy and involved the development of sector analyses on power energy, tourism, electronics, etc. A great number of advising projects for the newly established institutions, such as the Privatisation Agency, were started. Access to these projects was granted only to Western firms. At the moment the sources for free funding of consulting services are diminishing. This means Bulgarian companies resort to the traditional form of consultancy - they hire a Western consulting firm, pay the fee and then implement the results of the

advising process.

In the sample v/e have represented the two above mentioned cases: PHARE-funded services and services paid for by the enterprises. The studied cases indicate that directly financed services tend to be more efficient than indirectly financed ones.

MAJOR CONCLUSIONS

* Most of the companies have used both foreign and Bulgarian consulting services , which provides the opportunity for comparison. The opinion of the companies in most of the cases is that the quality of foreign consultancy is higher, as is the price.

* Bulgarian companies prefer hiring foreign firms which specialise in their field

of activity to firms with more general competence ( as is the case with GOPA and "International Economic Energy" )

* The experience of the consulting firm in the specific field and its contacts with the companies of the same branch are important factors , influencing the selection of a suitable consulting firm. * Short-term, consultancy is more popular than long-term because of the overall instability. The transfer of information between the companies-recipients is also an important factor influencing the selection.

* The average duration of foreign consultancy concerning restructuring is of medium size - less than 6 months , which is determined by the microeconomic instability.

* Most of the Bulgarian companies have no clear view of the potential results of the consultancy and of their implementation when signing the contracts. One of the major problems of foreign firms is that the consultancy concerning restructuring is separated from the companies' actual activity, (as is the case with MARITZA-1ZTOK, consulted by "International Economic Energy" ) The implementation of the consultants' advice is not obligatory for the Bulgarian companies. When the advice involves redundancies or increased spending, managements , as a rule , don't take the responsibility for the implementation. In this way, consultancy’ may become pointless. * There are cases when Bulgarian companies have no clear concept of how to put to practice the results of the consultancy. They experience difficulties in finding the right approach to their Western counterparts.

* As a whole, the demand for consulting services is shrinking.

Foreign technical assistance is reoriented towards Russia, Ukraine and the Commonwealth of Independent States.

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For Bulgarian companies, Western consultancy is sometimes prohibitively expensive. Western consulting firms, at the same time, are not always willing to offer price-reductions for their Bulgarian clients. The consulting services market is heavily segmented.

* Consulting services are not a panacea. They cannot totally resolve the problems of the companies. Sometimes the problems .are so great that they surpass the abilities of the managements to cope with them. Consulting services are usually more efficient in companies which are better off financially.

* As a whole, the case studies indicate that the efficiency of foreign consultancy concerning restructuring is relatively low. Short-term consultancy is usually more efficient. Most difficult to implement are the decisions connected with the need of institutional changes and redundancies. In such cases the opposition of the staff and the trade unions turns out to be a serious obstacle. Consultancy advising restructuring, technological changes and increased spending is less efficient due to the unfavorable credit environment. Most successful and popular are consulting services concerning automatisation of management and the accountancy system. Such services are the cheapest, the most efficient and encounter no institutional opposition.

There is an increased demand for services connected with financial management, development of business plans and analyses of the financial situation of the companies.

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